Bear Hug

What Is a Bear Hug?

In business, a bear hug is an offer to buy a publicly listed company at a significant premium to the market price of its shares, designed to appeal to the target company's shareholders. It's an acquisition strategy used to pressure a reluctant company board to accept the bid or risk upsetting its shareholders.

Key Takeaways

  • A bear hug is an informal offer to acquire a company at a premium to the market price of its stock, made public without the consent of its board.
  • A bear hug counts on the company's shareholders to pressure the board into accepting the proposed terms or entering negotiations with the maker of the offer.
  • If a target company refuses to accept a bear hug it risks being sued or challenged in board elections.
  • Without a tender offer for the shares outstanding, a bear hug is not a guarantee the bidder will purchase the company at the stated price.

"Bear hug" speaks to such offers' strength as well as their uninvited nature. By offering a price well above the pursued company's market value, the bear hug bidder makes it difficult for the acquisition target's board to refuse.

Understanding Bear Hugs

To qualify as a bear hug, the acquisition bid must offer a meaningful premium to the market value of the target company's stock.

Because company boards have a fiduciary duty to act in the best interests of the company and its shareholders, refusing a rich premium risks lawsuits, proxy contests and other forms of shareholder activism.

Since bear hugs can be a costly strategy for the acquirer, they occur by definition when the target company's board has either rejected or would be expected to reject such an advance, necessitating a direct appeal to shareholders.

At a minimum, bear hugs force the targeted company's leadership to explain why the bid—to say nothing of the market—undervalues their stock, and what the company intends to do about the low valuation.

A bear hug puts incumbent management on the defensive and focuses attention on the company's share price. One company chief executive on the receiving end of the tactic has described it as "a gradual, rolling dispiriting of the opposition. The whole idea of a bear hug is that it becomes an inevitable, self-fulfilling prophecy."

A bear hug offer, though usually financially favorable, is not solicited by the target company.

Bear hugs can happen when a company's stock has fallen on hard times, or simply because the acquirer places a high value on the targeted business. Elon Musk's unofficial offer to buy Twitter (TWTR) in April 2022 at an 18% premium to its market value but a 22% discount to Twitter's share price a year earlier was described as a bear hug.

Earlier examples include Xerox's (XRX) pursuit of HP (HPQ) in 2019, an attempt by Exelon (EXC) to acquire NRG Energy (NRG) in 2009, and Microsoft's (MSFT) bear hug of Yahoo in 2008. None of those efforts ultimately succeeded.

Advantages and Disadvantages of a Bear Hug

A bear hug allows the acquirer to present its bid directly to shareholders, bypassing the targeted company's board. The downside for the pursuer is that the tactic is unlikely to result in friendly talks with the incumbent management and board, who may seek a white knight deal with a different buyer viewed as more acceptable.

Shareholders of a company receiving a bear hug benefit from the prospect of a higher share price on offer. Even if it doesn't lead to a quick deal, a bear hug puts pressure on a company's board and management to get the share price above that offered by the bear hugger.

Unfortunately, a bear hug implies incumbent management and board members are not interested in a friendly deal. And, absent a formal tender offer, a bear hug has no sure way to overcome that resistance.

A bear hug has the potential to distract managers and directors of the targeted company to the ultimate detriment of its business and all stakeholders, including the bear hugger if they are successful. Whether directly or by implication, a bear hug draws critical attention to the company's current management and share price.

If the bear hug is ultimately successful, incumbent managers are likely to face ouster by new owners. They might have to content themselves with golden parachutes triggered by change-of-control provisions in their executive pay agreements.

Article Sources
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  1. Fortune. "When a Takeover Battle Goes Nuclear."

  2. Bloomberg. "Sure Elon Musk Might Buy Twitter."

  3. DealLawyers.com. "Hostile Deals: Xerox Gives HP a 'Bear Hug'."

  4. The New York Times. "Microsoft's Bear-Hug Approach to Yahoo."

  5. U.S. Securities and Exchange Commission. "Change of Control."

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